I would not be surprised if the shares of ASPS more than doubled in the next 12 to 18 months. Free cash flow will be almost $6.30 a share. Why can't the shares trade at 15x free cash flow? ASPS may be the stock of the decade. BTW, it's doubled in 2 years.

Core CPI is currently rising at the quickest pace in almost three and a half years.

The core and headline January CPI rose by 0.2%, which was in line with expectations.

Many market players didn't want to do much ahead of the long weekend, with the possibility of more news coming out of Greece while the market is closed Monday.

But the old adage about not shorting a dull market came to life and the market held up. The bulls may not have wanted to do a lot of buying, but they did more than enough to keep the bears from gaining traction.

Once again, underlying support is remarkably strong, and one mild dip was well bought. There wasn't a lot of major strength, and Nasdaq breadth was even, but the price action could not be faulted.

Dow 13,000 talk is heating up again. I expect to hear that kind of chatter as the market tops; it's a sign of overconfidence and complacency.

On the other hand, it has been very easy to make bearish arguments for quite a while, even though they haven't mattered. Until there is an actual change in the price action, the arguments are irrelevant, even dangerous.

On Tuesday morning, we'll likely be reacting to Greece one way or another. Some sort of deal will give the market short-term support, but in the long run, we know that it is a matter of time before Greece is in trouble again.

I suspect that Europe will eventually be the catalyst for a market turn, but they are doing a good job of kicking the can down the road and preventing the overanxious bears from gaining a foothold.

Thursday, February 16, 2012

Today's tweet of the day is again from Hedgeye's Keith McCullough: "Evolve or whine."

Housing continues to show signs of recovery as the NAHB confidence index rose to 29 (consensus was 26), the best reading in four and a half years and substantially above the recent six-month average of only 20. This index has risen for six consecutive months, a feat not accomplished in 16 years.

After the sudden drop in AAPL and an intraday reversal of the indices yesterday, many market players quickly became bearish. After all, the market has been extended and hasn't corrected for quite some time, so didn't it make sense to anticipate more profit-taking in the near term?

What the bears failed to appreciate was that the dip-buyers weren't ready to go away. They have had great success for a very long time, so when we had slightly decent economic numbers and then news that Greece was going to be saved (yet again), they piled in and just kept pushing. The bears, who felt so confident last night, were forced to reverse course suddenly and yet another straight-up move was under way.

It is almost comical that the market keeps responding to news about Greece when everyone knows it's just a matter of time before it defaults. Greece is just a convenient excuse for dip-buyers to do what they are already inclined to do. When the market really does have a change in character, the news will be viewed in a much different way.

So here we are, right back where we were a couple of days ago. We had a brief hiccup that helped to create a little negativity and, in the ironic way the market works, that helped to propel the move to the upside today.

It was a solid day for the bulls, with decent volume and close to-3-to-1 positive breadth. It is amazing how fast we can regain upside momentum.

I continue to believe that the optimism surrounding Greece is misplaced.

Greece is bankrupt, and almost nothing the European leaders can do will change it.

Today the yield on the two-year Greek note rose to above 200% for the first time in history.

From the Financial Times:

Sounds like European governments are moving to delay any decision until March 2, another two weeks beyond Monday's Eurogroup meeting. A working document distributed last week says the governments will try and force through the PSI debt swap (expected to be announced tomorrow) before committing any more money. Both Lazard and Cleary Gottlieb advised the officials that PSI without Troika pushing through the second bail out would mean take up could suffer (forcing CACs?) and that bond holders would have weeks of uncertainty. As the article ends, "In its legal advice, Cleary Gottleib said it would be legal to scupper the debt swap even after the invitation went out, but it warned against it...Each sovereign restructuring is unique and sets a precedent," says the legal note. "The adverse reputational consequences (for [Greece] as well as the rest of the EU) of launching a transaction that fails as a result of their collective failure to meet the conditions should be assessed very carefully."

The character of the action changed a bit today as the bears put up their best fight in a long time. The dip-buyers spiked us up to recent highs twice during the day but were turned back rather vigorously both times. We even went out at the lows as the market ignored more yammering from the European finance ministers, who are obviously hoping to keep their comedy show running for a few more months.

What was most notable about the action today was that AAPL, the holiest of the holy in the land of dip-buyers, reversed hard and went out at its lows. Apple had been up for 10 straight days and acted like it would never go down again. It has been anointed the greatest stock in the history of mankind, and it is guaranteed to upset the market beast that punishes anyone who gets too cocky.

The big question for us to contemplate now is whether the recent back-and-forth action is a signal that we are building a significant top or just healthy consolidation which will eventually set us up for further upside.

I don't know the answer to that question, but I'm leaning toward the defensive side. Maybe with Apple finally being knocked down, the indices will be more reflective of the action in individual stocks.

The 17 brands that make up Apple's smartphone competition have a total market capitalization that falls about $100 billion short of Apple's current equity value.

No one deserves this level of adulation -- no one.

I believe that the stock market will do better in 2008 than it did in 2007, when it chalked up a 5.5% return, the fifth year in a row that the market went up. Year-ahead forecasts for the market are notoriously difficult, but I believe that a 10% to 12% gain is possible, on the heels of a recovering financial sector. Financial stocks plummeted about 20% last year, and this was the reason why the market had a mediocre year. Outside of financials, the S&P 500 Index had double digit returns. A revival of financial stocks would spur good market gains this year.
-- Dr. Jeremy Siegel, "Outlook for 2008"

Over the past few weeks -- in a cover story by Gene Epstein in Barron's ("Enter The Bull"), in flattering words of endorsement from Jim Cramer on "Mad Money" and on Real Money, on CNBC's "Street Signs" and in an appearance on "Fast Money" -- Wharton Professor Dr. Jeremy Siegel has been heralded for his wisdom and forecasts.

History shows that the media has a penchant for untimely anointments -- the names are well known by all of us. Think Dr. Nouriel Roubini and his very incorrect view on stocks and of the economy since the generational low in 2009, or Meredith Whitney's wrong-footed view on municipals over the past 18 months.

I recognize that Roubini correctly forecasted the demise of the world's economy and the consequences of the mushrooming of the derivative market in 2007-08, and Meredith Whitney correctly predicted the demise of the domestic banking industry during the same time frame. And I also recognize that Siegel, along with many other pundits, expressed caution toward the sky-high technology multiples in late 1999 and early 2000.

But quite frankly, the streets of Wall Street are paved with geniuses who have made one great call in a row.

I don't mean this to be an ad hominem attack on Siegel (or on the others), but frankly I don't get the media's adulation, continued preoccupation and almost deification of these wags and their views.

Dr. Siegel comes off as a very nice person, but he is an academic who has been bullish at some very wrong times. Importantly, his theories regarding equities for the long term have been wildly off, as bonds have outperformed stocks for one, five, 10, 30 and 40 years, which, according to his investment thesis, is impossible.

His view on the fixed-income market also has been manifestly incorrect over the last two years. Dr. Siegel's Wall Street Journal op-ed, "The Great American Bond Bubble" was wrong in its conclusion back in August 2010.

There is just one problem with tracing stock performance all the way back to 1802: It isn't really valid. Prof. Siegel based his early numbers on data first gathered decades ago by two economists, Walter Buckingham Smith and Arthur Harrison Cole.

For the years 1802 through 1820, Profs. Smith and Cole collected prices on three dozen banking, insurance, transportation and other stocks — but ended up including only seven, all banks, in their stock-market index. Through 1845, they tracked 19 insurance stocks, but rejected 95% of them, adding only one to their index. For 1834 onward, they added a maximum of 27 railroad stocks.

To be a good measure of stock returns, an index should be comprehensive (by including many stocks) and representative (by including the stocks commonly held by investors). The Smith and Cole indexes are neither, as the professors signaled in their 1935 book, "Fluctuations in American Business." They cherry-picked their indexes by throwing out any stock that didn't survive for the whole period, whose share prices were too hard to find or whose returns seemed "inflexible," "erratic," or "non-typical."

Thus, Siegel's basis for Stocks for the Long Run [2] exclude 97% of all the stocks in the early history of the US market by cherry picking winners, ignoring survivorship bias, and engaging in data smoothing.

Oops.

What did this do to the results? As you would imagine, it juiced them significantly. The era of 1802-1870 ended up with a much bigger dividend yield then it should have had. Siegel originally started at 5.0%, but over ensuing versions, that crept up to 6.4%. The net impact was to raise the average annual real returns during the first half of the 19th century from 5.7% to 7.0%.

If you artificially raise the initial returns in the early part of the data series, then the final annual returns become much higher. As Zweig sardonically notes, "Another emperor of the late bull market, it seems, has turned out to have no clothes.

To summarize, as Bill King has put it, "Permabull Jeremy Siegel, who has been not just wrong but magnificently wrong, is forecasting DJIA 15k."

Typically, light-volume pullbacks within an uptrend are healthy. They allow stocks to migrate into stronger hands as short-term holders take profits, and they allow big funds to accumulate at lower prices. As long as the pullbacks are contained, they make it more likely for further upside.

That is what saw today. But a late spike caught the bears leaning the wrong way after several failed intraday bounces. We had a decent recovery and ended up with just mild losses. The perma-bulls love that the bears are so inept, but it makes for dangerous conditions when there is so little fear.

Disinterest is what really kills a market, and you have to wonder what is going on as volume on the NYSE continues to descend to levels not seen in a very long time.

You would think that a market that has been trending up for weeks and is close to its highs would be generating increased interest, but we seem to be going in the opposite direction, which makes the persistent bids seem more manipulative than indicative of real accumulation.

Ultimately, price action is what matters and it is hard to argue with a market that closed the way this one did today. We had a number of failed bounces and looked ripe for the weak finish, but the dip-buyers wouldn't stand for it. I suspect that the computers had something to do with the energetic close, but it just goes to show that you really have to be careful fighting this market.

Tuesday, February 14, 2012

TROX manufactures titanium dioxide and is one of five companies with the technology to produce it via the chloride method, which is cost-efficient and environmentally friendly. Tronox recently announced a merger with a division of Exxaro Resources [EXX.South Africa], a South African company that mines titanium dioxide feedstock. This will make Tronox vertically integrated. The acquired business has a 1.5-million-ton stockpile of ilmenite, the feedstock, which is in tight supply.

Tronox hit a high of $165 last year. Shares have backed off due to market turmoil, mixed feelings about the acquisition and uncertainty regarding the economy. Most important, sales of titanium dioxide were slow in the fourth quarter. Investors didn't understand this was a seasonally weak period. Insiders have been buying shares at Kronos Worldwide [KRO], a Tronox competitor, which adds credence to the buy idea on TROX.

Tronox came out of bankruptcy court last year. Why did the company go broke?

It was spun out of Kerr-McGee with a lot of environmental liabilities and debt. Then the financial crisis hit. But there have been positive surprises since 2011. Tronox has tax-loss carryforwards that are worth about $30 a share. And the company has incredible earnings power, in the range of $20 to $30 a share. Analyst had guessed it was around $12 a share. Some think it is overearning because of the tight supply situation, but even using an 11 multiple of the prior estimate and adding the tax assets and the next 12 months' free cash flow gets you a target price of more than $190 a share. If earnings continue to grow at the current rate, they might be sustainably closer to $20, which gives you a $250 stock.

Moodys, that forward-looking thoughtful ratings agency, has reduced the debt ratings of six European countries including Italy, Spain and Portugal and has revised its outlook on the U.K.'s and France's top Aaa rating to "negative."

A rumor has it that Saudi tanks have approached the Jordanian border, giving a 72-hour ultimatum to Syria.

Today's tweet of the Day is from Hedge Eyes' "Keithy" Keith McCullough: "It appears to me that the old broken glass/economic growth model of Keynes has met its burning buildings #Greece."

The Greece deal is really no deal but rather a slow-motion train wreck to bankruptcy.

Why have all the Cassandras been wrong? Because they ignored the power of central banks to cause credit spreads to narrow. The outcome is reflected in market movements and in certain sectors....

The European Central Bank's ingenious concept of a three-year, 1% loan via LTRO (long-term refinancing operation) worked. It was successful because it allowed the banks to buy their own debt at a higher yield than 1%, book the difference in yield as income, and mark up the value of their own bonds to par. That process functioned as a mechanical way for there to be an addition to the bank's capital. The ECB used a creative way to solve a portion of its eurozone and the Europe-wide banking crisis....

We have replaced meltdown of the type we saw after Lehman/AIG with "melt-up" of the type we have been seeing since March 2009. We have shifted from collapsing leverage and failure at the institutional level to central bank intervention of unprecedented size....

We are going through huge transitional times. Never before have we seen coordinated, global central bank activity of this order or magnitude. By the end of this year, the G4 central banks will have expanded their balance sheets approximately threefold during the financial crisis. The negative and inflationary results of this activity may appear in the future. That remains to be seen. For the present, this is a very bullish construction for asset prices and equities in particular.

The bears had a good opportunity to build on Friday's weak action by selling the gap-up open, but they failed miserably once again. There was a brief dip in the first hour or so of trading, but the buyers didn't wait long, and they walked us back up the rest of the day.

Not only was the underlying support very impressive, breadth was quite strong, with 4,200 gainers to just 1,400 decliners. Volume was light, but the big-cap momentum favorites were lively, with PCLN, ISRG, AAPL, GOOG, AMZN and BIDU attracting attention. Small-cap oils were the favorite speculative play today, but there was no shortage of green on the screens.

It is extremely tempting to keep trying to call a top in this market, but by now it should be painfully clear that sticking with the trend as long as you can is the way to go.

Saturday, February 11, 2012

It' been a long time coming but today we saw the worst action of 2012. We've had only one other bad day this year, Jan. 26, where we sold off all day and closed near the lows. Despite a last-minute spike, we not only sold off and closed near the lows, but it was the biggest point loss of the year.

The big question is whether this is an indication of a major change in market character and an intermediate top, or long overdue profit-taking that will give us a healthier market as we shake out recent excesses. It's been amazingly one-sided for so long that it was inevitable the streak would end.

While it's probably a good idea to lock in gains after the big run, it's premature to conclude that the uptrend is over and a major breakdown will ensue. In fact, it can be argued that this is merely a return to normality and a little downside is healthy. The market needs to shake out overly exuberant bulls now and then to rebuild skepticism and attract new buyers.

Earnings season is basically over and we are heading into a weaker time of the year seasonally. The issues in Europe are not improving, so the bulls will have some headwinds to contend with going forward.

Thursday, February 9, 2012

The dip-buyers did their thing for a third straight day but they weren't as enthusiastic. Fortunately for the bulls, AAPL kept us in positive territory. Although the bulls managed minor gains, breadth was slightly negative and we closed a little soft.

The market continues to hold up remarkably well, which may be due in part to so many folks looking for a pullback. Every time it looks like we may finally see a little downside momentum, the dip-buyers jump in and put the squeeze back on. Any bear that feels confident isn't paying attention to the action.

Even if you are bullish and don't expect a top to occur soon, it is a challenge to keep chasing higher and higher. Many bulls are rooting for some downside to get a better opportunity to put cash to work.

Once again, this market showed why intraday weakness shouldn't be trusted. As soon as we breached Tuesday's low, the dip-buyers jumped in and had us back into positive territory by the close.

Strong action in AAPL, GOOG and other big-cap momentum names helped to fuel the bounce, but it was a broad-based recovery and with solid breadth by the finish.

Like yesterday, the bounce had the feel of being driven in large part by algorithmic trading that took advantage of the many market players who are overanxious for a pullback. The inclination is to press the short side when we finally breach an important intraday level, but those bears are immediately squeezed and that helps propel the very fast bounces.

It is the close that counts, and this was another good one. If you really want to play the dark side, wait for a weak finish and some sort of news catalyst to trigger exits.

What we have is a market that the technicians claim is obviously extended but keeps running because dip-buying is working so well. The market loves to stick with a pattern that works until it is obviously broken, and this pattern still works just fine.

The company funds its growth through the issuance of match-funded non-recourse debt in the form of collateralized loan obligations and collateralized debt obligations.

KKR Financial enjoys a strong ROI (rising), a 9% dividend yield (rising, expected 50% growth in dividend distributions) over the last 12 months and trades at a slight discount to book value (rising).

KKR Financial reported core investment income of $0.35 per share compared to consensus of $0.32 a share.

Book value increased 3% sequentially, to $9.41 (buoyed by retained earnings and gains on investments), cash earnings rose from $0.35 per share to $0.39 per share, and net interest income advanced by 4% from third quarter 2011.

There was no loan-loss provision, and the company deployed about $200 million in the period. Return on equity exceeded 18%, well above Street forecasts.

The company distributed $0.26, which included a special dividend of $0.08, again above expectations.

The pro-forma 2012 dividend yield is 9%.

According to a Greek official, the government is drafting an agreement on a bailout deal for approval today. Right. And all the Greek tax cheats are announced they are lining up, with cash in hand, at the Greek equivalent of the IRS.....

Investing in the market or in individual securities is always about asking myself the question, What is the risk and reward?

Chasing stocks (in either direction) is not for me, as price is what you pay, and value is what you get.

After the straight-up run we've had recently, many market players have been anticipating at least a minor pullback. It looked like they might have been right when we started the day, but the dip-buyers jumped in and we ended up closing in positive territory near the highs.

The action felt like it was driven by computerized trading, which took advantage of many market players looking for a pause in the action. When we bounced back from this morning's dip, the machines kept pushing and that helped create a short squeeze. Extremely light volume indicates the absence of buying by major institutions.

Typically, an uptrending market doesn't need a major pullback to set up new opportunities. A couple of days of profit-taking will be sufficient to reset a few things, but we just haven't seen that with this market. We become more extended as the dips are snapped up by hungry, underinvested bulls.

There is an old saying that extended markets can become even more extended. That has certainly been the case. It will end one of these days, but even the fortune-tellers don't have a clue when that might be.

Once again, the dip-buyers show how tough they can be. We opened slightly soft, but that proved to be the lows of the day as the market inched slowly back up and closed with minor losses.

Breadth was a bit weaker than indicated, but there was enough speculative action in shippers, small biotechs and large oil services to offset pressure on chips, retail and precious metals.

Just about everyone recognizes that this market could use a rest, but as long as it refuses to let up they are going to keep looking to buy. There was strong action for a market that is tired and technically extended.

I think it is time, again, to expose the BLS' shennanigans to both keep the headline unemployment rate suppressed, and to generate an upward bias in the market courtesy of a "bigger than expected beat" of "expectations." Granted, various semantics experts continue to scratch their heads in attempting to explain a collapsing labor force when even Goldman's Sven Jari Stehn just predicted that it will drop to 63.1% by the end of 2012 (and 62.5% by the end of 2015). Funny, then, that the US will have no unemployment left when the participation rate drops to 58.5%.....And no, the "population soared" argument based on "revised data" doesn't quite cut it when the bulk of said surge not only did not get a job, but was not even counted toward the labor force. The biggest flaw with all these arguments that vainly attempt to defend the US economy - as if it is growing - is that they focus exclusively on the quantity of jobs, doctored or not, and completely ignore the quality.

Saturday, February 4, 2012

KFN at $9???

Regarding today's jobs report, here is the downside to the "strong" labor report (that could constrain, though probably not deny, the upward movement in stock prices):

1. Today's outsized REPORTED jobs "gains" eliminates any chance of QE3, which the bullish cabal has expected.
2. A strong labor market, if it in fact exists/continues, will force the Fed to raise the federal funds rate well before the recently announced date of late 2014.
3. A so-called much improving economy raises re-election odds of President Obama. Most consider a Democratic/Obama win in November's presidential contest as not as market-friendly as a Republican (presumably Romney) win.

According to a Washington Post article, Secretary of Defense Leon Panetta believes there is a growing possibility that Israel might attack Iran as early as April.

The Secretary's remarks are in line with a recent lead article in The New York Times Sunday magazine section two weeks ago.

The real issue for risk markets is how will stocks respond to a successful attack? My guess is down on the news but up, in the fullness of time (once it is digested by the markets), as planet Earth is rid of a nuclear Iran.

From there, the issue likely becomes whether Iran retaliates.

Regardless, I believe the greatest risk to the markets is geopolitical, not economic.

F and GM are uniquely positioned to benefit from unleashed pent-up demand for cars, reflecting in part the record 10.8 years average age of the existing car fleet on the road.

The automobile industry, unlike the housing industry, is not burdened by the supply of unsold home inventory.

On Thursday January light vehicle sales rose to 14.2 million units (SAAR). Expectations were for 13.5 million, in line with December.

January's sales represent the best SAAR in three and a half years and were substantially above the fourth quarter 2011's 13.4 million units and suggest that consumer spending on durables will remain firm in first quarter 2012.

The current sales rate of 14.2 million units is still well below the trend line demand of over 16 million units, so there is a lot of runway left for the industry to recover.

This auto sales release and other recently released high-frequency economic statistics call into question the recessionistas' downbeat views and suggest that a self-sustaining economic recovery is in progress.

Early in the week, the market looked like it might be in danger of rolling over after a good run in the month of January. But it jumped higher on the first day of the new month and it hasn't looked back.

I suspect that the bears were over anticipating some sort of correction and when the market suddenly turned back up they had to scramble to reposition.

The main catalyst today was the better-than-expected jobs news. Again, I suspect that there were too many folks looking for some "sell the news" action. When that didn't work, they gave up and turned into buyers.

Probably the most impressive thing about this market continues to be how one-sided the action is. There are barely any dips at all and the dip-buyers have been forced to pay up if they want to play.

I find it a bit troubling that complacency seems to be increasing; this one-sided move has made anyone who is fearful feel just plain ridiculous. What is there to worry about when the market never goes down -- despite lots of good reasons why it should?

Looking at the euphoric jobs "data" from Friday from every angle. Is it credible? The CEO of TrimTabs, who likely knows this data a little better than the average Jim on the street, having collected tax witholdings data for the past 14 years, is modestly apoplectic at the adjustments. In one of his more colorful episodes, and rightfully so, Charles Biderman notes that "Either there is something massively changed in the income tax collection world, or there is something very, very suspicious about today’s BLS hugely positive number," adding, "Actual jobs, not seasonally adjusted, are down 2.9 million over the past two months. It is only after seasonal adjustments – made at the sole discretion of the Bureau of Labor Statistics economists – that 2.9 million fewer jobs gets translated into 446,000 new seasonally adjusted jobs." A 3.3 million "adjustment" solely at the discretion of the BLS? And this from the agency that just admitted it was underestimating the so very critical labor participation rate over the past year? Finally, Biderman wonders whether the BLS is being pressured during an election year to paint an overly optimistic picture by President Obama’s administration in light of these 'real unadjusted job change' facts. Frankly, in light of recent discoveries about the other "impartial" organization, the CBO, I do not think there is any need to wonder at all.

A re-allocation into stocks (and out of bonds) represents an underappreciated and potentially massive (and latent) demand that could easily be the catalyst for a move to all-time highs in the S&P 500 in 2012.

Since 2001, as measured by stock holdings as a percentage of total financial assets, individual investors' share of stocks has declined from 25% to only 18%. In the same time frame, stock mutual funds have dipped from 79% of total mutual fund assets (excluding money market funds) to only 65% at year-end 2011.

Hedge Fund Investors

After Wednesday's close the ISI Hedge Fund Survey, which is based on the actual exposure at 36 long/short funds, which have approximately $90 billion in assets, indicated that net hedge fund exposure moved down to 44.3% (while gross exposure dipped to 49.7%). This is close to the lowest level of long exposure in four years and equivalent to the low exposure at the generational low in March 2009.

Large Pension Fund Investors

There is less official data on pension funds than on retail investors and hedge funds, but it is commonly recognized that pension funds are disproportionately exposed to fixed income over equities. This important asset class remains fearful of stocks, preferring the haven of safety available in low- or virtually non-yielding bonds (which provide returns well below actuarial assumptions).

Watch What They Do, Not What They Say

I prefer to watch what investors do, not what they say. That is why I am dismissive of many of the sentiment surveys (AAII, Investors Intelligence, etc.) as well as put/call ratios (which are further rendered relatively meaningless, owing to the proliferation of leveraged ETFs).

The aforementioned de-risking and flight to safety in bonds by all three dominant investor classes help to explain the last five years of action in domestic equities and the contraction in P/E ratios in 2011.

I expect the recent trend of large outflows over the last year (and last five years) to be reversed in 2012. Not only are interest rates at generational lows but many high-quality companies are yielding (at 2.5% or even better) well above the yield on the 10-year U.S. note.

At first, similar to the past two weeks, in which under $1.5 billion has come into stock mutual funds, the pace of inflows will be slow. As it becomes clearer that the domestic economy is self-sustaining, that the European debt crisis is showing continued evidence of stability, that a Republican presidential win in November grows more likely and that corporate profit (and margin) expectations will be achieved, I expect the rotation out of bonds and into stocks to accelerate.

Tactically, I favor the asset management stocks such as OZM, TROW, WDR and LM and the discount brokerage stocks such as ETFC and SCHW as direct beneficiaries of the expected rotation out of bonds and into stocks in 2012.

While the indices had a very mixed day, very dogged underlying support prevailed again and prevented any real weakness. There was a fair amount of speculative action in individual stocks, which I suspect is a function of underperforming bulls trying to catch up with a market that won't go down.

While the market has been struggling over the past week to make progress, it is still holding and we need to respect the fact that the uptrend is intact. There are plenty of reasons to be wary but, so far, there is no price action to support the bearish bet.

Don't forget we have the monthly jobs news in the morning, and that will be a major market catalyst. I'll be looking for the bears to try to sell any strength the news brings and, of course, I'm sure we can count on the dip-buyers to step up fast if there is a negative reaction.

The asset management sector has been weak over the past few days based on misses at LM and WDR. Those misses aren't surprising, though, because outflows have been unmerciful during late 2011 and 2012 (32 of the past 34 weeks yielded outflows!). But that is exactly when one should buy a cyclical like an asset managers.

Remember what Roy Neuberger once said: "Buy cyclicals when the factory door is padlocked. Sell cyclicals at the sound of trumpets."

Like discount brokers, traditional asset managers have likely seen the nadir of their fundamentals. Mutual fund inflows are trickling back, but there is a huge potential of a massive rotation out of bonds and into stocks that could materially change the earnings picture for the group.

I would be a buyer of the group now.

Now look at housing-related stocks (particularly the homebuilders) and consider their quick and substantial share price advance, well before the housing markets have improved (in price and turnover activity).

The same should occur in the asset managers, as stocks typically discount news well before there is an inflection point in fundamentals.

This is interesting: ETFC, which has often been rumored to be a potential takeover target of rival AMTD, named Frank Petrilli its new chairman. He replaces Chief Executive Steven Freiberg, who held the role on an interim basis since last spring.

Petrilli, 61, was most recently CEO of Surge Trading. But he also has past ties to TD, a 45% owner of TD Ameritrade. As noted by Dow Jones Newswires, Petrilli held several positions at TD Waterhouse, formerly a U.S. unit of TD Bank Group, from 1995 to 2004. He reported to the Canadian bank's current head, Ed Clark.

"We suspect Mr. Petrilli's relationship with Mr. Clark is strong and can only benefit E-Trade over the longer-term as it looks to potentially unlock the embedded value of the franchise with, in our view, its #1 acquisition/merger candidate, TD Ameritrade," Sandler O'Neill analyst Richard Repetto told clients in a note.
-- Barrons

This Barron's piece yesterday, "E-Trade Names New Chairman With Ties To AMTD: Coincidence?" piqued my interest and raised the specter of a possible takeover.

I have concluded that despite no apparent short-term catalyst, there is little risk in the shares.

Moreover, the recent weak DARTs monthly data likely represents the nadir of the discount brokerage cycle for both ETFC and SCHW.

ISM comes in at 54.1, slightly below expectations.

Fitch says Greece will default. Big surprise!

The ADP report was basically slightly less than consensus -- it should have no impact on risk assets, as it probably reflects some reversal of seasonal adjustments which distorted December's release.

Stated simply, our monetary policy (coupled with global easing) is inflationary. In the fullness of time, bonds will suffer.

Now the only question is how we define "the fullness of time"!

Fears of hard landing in China eased as China's January manufacturing index rose to 50.5 (expectations were 49.5) vs. 50.3 in December. This is the best print since September 2011. New orders advanced for the first time in three months while shipments rose to best level in more than six months. As a perspective, China's real GDP increased 10.4% in 2010, +9.2% in 2011 and consensus lies at +8% to +8.5% for 2012 (bottoming at +7.5% in the first half). Like the rest of the planet, I expect China to ease in the months ahead (with a bank reserve requirement reduction imminent).

The January Chicago Manufacturing Index came in at 60.2 (expectations were 63) compared to December's 62.2. This was the third consecutive month with a reading over 60. It is important to recognize that 60.2 is indicative of relatively robust growth and compares positively to the long-term average of only 54. Importantly, the production and order components were strong. The equity market flinched, but recovered nicely from this news.

The January conference board's index of consumer confidence came in at 61.1 vs. 64.8 in December and against expectations of 68.The print contradicted the previously released Rasmussen and University of Michigan consumer numbers. Again, the market rebounded from this release.

Case-Shiller's home price index continued to fall. There was a slight reacceleration in home prices' rate of decline. November prices (year over year) were down by 3.7% (previous months' drop was 3.4%). I have written that the aggregate home price indices fail to address the developing bifurcation in the residential real estate market, with areas of the country that are unencumbered by a large shadow inventory of unsold homes doing far better (e.g., the D.C.-to-Boston corridor). Moreover, bank lending standards are easing (based on the most recent survey), the ownership/rental equation is improving, mortgage lending rates are at historic lows and the jobs market is experiencing a slow - very slow - improvement -- all positive factors contributing to a stabilization of the U.S. housing markets. I expect no price degradation within receipt of the 1Q2012 Case-Shiller Index release.

The employment cost index continues to suggest that unit labor costs (and wage inflation) will be tame, likely extending a market-friendly profit/dividend/share buyback cycle. The wage index was +0.4%, in line with consensus. For the year, private wages increased by 1.6%. I want to emphasize that corporate profit margins typically don't contract until unit labor costs increase by greater than 3.5%. We are under 2% now!

After the market basically went straight up for the entire month of January, a number of market players were anticipating that the indices might take a rest. We had four straight days of mixed action to end January, and it looked like we might be weakening, but it turned out to be a bear trap, and it was sprung today.

What made today particularly impressive was that the upside move picked up steam even though there really wasn't any real catalyst for the strength. Economic reports were mixed, Greece continued to promise it would have a debt deal any minute, AMZN's earnings were unexpectedly weak, and there wasn't any real positive headline news. In the perverse manner of the market, that probably helped to keep things running, as it increased the fear of being left behind.

Although we have had a number of runs like this in recent years, these markets with the never-ending bids are not as easy as they look unless you just buy and hold and never have an interest in selling an extended stock.

Tuesday, January 31, 2012

Over the last eight trading days, the S&P 500 has declined a grand total 0.13%, which is less than 2 points. Strength is being sold and weakness is being bought, and that keeps us pinned down. For four days now we have had negative action but don't quite seem to crack. Last Thursday we had steady selling all day, but in the last three days the dip-buyers have bailed us out just in the nick of time. With window-dressing pressures now over, will those dip-buyers be less zealous?

I'm seeing this is the first January ever in which the S&P500 did not have a day with a loss of more than 0.6%. It just goes to show how the market has not traded in "normal" fashion. When human beings are in control, there usually is some ebb and flow, and emotions shift, but in this market, which is largely machine driven, we never have the excess of emotions overcompensating in one direction then the other.

AMZN earnings are out, and revenue disappointed. That is giving us a little pressure after hours, but this is a market that keeps bending but not breaking. As long as those dip-buyers are out there, we'll be OK, but you have to wonder if they are losing some steam.

Yields on Portugal's two-year note are now nearly 21%, up 370 basis points on the day. The 10-year note has risen in yield by almost 200 basis points, to over 17%.

Let's not lose sight of the fact that Portugal is smaller than Greece (as Peter Boockvar noted an economy of $225 billion vs. Greece's $285 billion). More importantly, public debt in Portugal is less than half of Greece's $455 billion.

A strong U.S. dollar is not a prerequisite for a healthy U.S. stock market.

Recently, a number of market observers (most notably Hedgeyes's Keith McCullough and "The Kudlow Report's" Larry Kudlow) have opined that the health of U.S. equities is dependent on a strong U.S. dollar.

Based upon history, however, the notion that a strong U.S. dollar is a prerequisite for a strong U.S. stock market is a myth.

Intrade has Romney's chances of winning the Florida primary at 97% vs.Gingrich's chances at 4%. Intrade has Romney's chances of winning the Nevada caucus at 94.3% vs. Gingrich's chances at 4%. Intrade has Romney's chances of winning the Republican nomination for presidential candidacy at 87.8%. Intrade has Obama's chances of being reelected at 54.4%.

It looked as if the European sovereign debt issues were going to trigger selling at the open, but the market held up reasonably well given the few positives in the air. The dip-buyers managed two good bounces and breadth managed to improve quite a bit from nearly 4-to-1 negative in the early going.

Although we did manage to close near the highs of the day, there wasn't much aggressive accumulation to be found. AAPL helped the bull cause, but every major sector was in the red and Facebook mania calmed down.

The big question is whether a couple days of soft action is a sufficient correction to help set the stage for more upside. I'd really like to answer with a yes, but there have been very few signs of any real pessimism. We pretty much shrugged off Europe, and the attitude is complacency, even though there are good reasons to believe the selling has not run its course.

My fear is that the dip-buyers have used up a lot of juice recently and don't have much to show for it, which may cause them to be less aggressive on subsequent pullbacks. Dip-buying always sounds great in theory when we are trending up, but it loses its appeal quickly when the bounces don't hold.

A pair of important developments will have a positive intermediate-term impact on the markets and on risk assets.

While I continue to expect some short-term market weakness, two important developments occurred over the past few days that will have a positive intermediate-term impact on the markets and on risk assets:

1. Mitt Romney has materially regained his lead in the Florida primary and the likelihood of him winning the Republican nod for presidential candidacy has measurably increased as well (based on this week's Intrade probabilities). A political regime change and Republican presidential win in November must be viewed, in the fullness of time, as market-friendly.

2. The Fed announced its intention to keep interest rates low into 2014. This will have a generally positive impact on equities but will have a mixed impact on financial stocks.

Regime Change

Let's first start with the Romney/Gingrich contest, remembering that a regime change in the November 2012 elections would be considered market-friendly and is an important precondition that I hold for the possibility that the S&P 500 regains new heights in 2012.

This morning's Wall Street Journal features a headline-grabbing poll conducted in tandem with NBC (below) that gives the impression that Gingrich is a clear leader over Romney. But when we read the fine print, we see that the poll was conducted days ago (Jan. 22-24) and only 441 Republican primary voters (a small sampling) responded. I totally dismiss the poll and question why The Wall Street Journal even published this old poll.

By contrast, below are the current Intrade probabilities (Jan. 27), which are more important to me and clearly show that Romney has resurfaced as a frontrunner for the Republican Party's nomination.

Intrade has Romney's chances of winning the Florida primary at 91%. Intrade has Gingrich's chances of winning the Florida primary at 8%. Intrade has Romney's chances of winning the Nevada caucus at 94.5%. Intrade has Gingrich's chances of winning the Nevada caucus at 5%. Intrade has Romney's chances of winning the Republican nomination for presidential candidacy at 87.5%. Intrade has Obama's chances of being reelected at 54%.

I view the reestablishment of a large Romney lead as an important intermediate-term market positive.

Fed Policy Buoys Risk Assets, Hurts Some Financials

The second development -- that is, the Fed's announcement on Tuesday that interest rates will remain low into 2014 (and perhaps longer) -- while also a general market positive, will adversely impact certain sectors of the financial industry. If interest rates remain subdued, equities are now more valuable (in any discounted cash flow/earnings model).

That said, some areas of the financial sector (in particular) will be negatively impacted by Fed monetary policy, as net interest margins and low reinvestment rates will reduce many bank and insurance companies' earnings power and likely yield lower valuations and risk/reward ratios by threatening upside price targets.

It is important to note that I don't think there is much downside risk to financial stocks but I do think upside targets have been reduced and (obviously) industry risk/reward has turned less favorable.

That said, some areas of the financial sector will benefit from lower interest rates in the form of improved capital market activity, continued low mortgage rates and a rotation out of bonds into stocks. These include private mortgage insurers such as MTG; investment brokers such as MS and GS; and asset managers such as TROW, LM, OZM and WDR.

Banks, in particular, including C, JPM and WFC, are negatively exposed to the Fed's Tuesday announcement of policy -- they have balance sheets that are net-asset-sensitive -- as non-trading income and net interest spreads will be compressed.

Life insurance companies such as PRU, MET and LNC face reinvestment issues that will mute profitability and upside price targets.

Discount brokers such as SCHW and ETFC, and investment brokers such as Goldman Sachs and Morgan Stanley face a more mixed picture. While discount brokers' profitability and "earnings power" will be negatively impacted by low interest rates, in theory, a more healthy stock market will draw retail investors back into the market -- and I expect daily average revenue trades to improve at Schwab and E*Trade after a weak fourth quarter 2011. The major investment brokerage industry's future profitability has been enhanced by the likelihood of improving capital market activity and the probability that merger and acquisition volume will accelerate in the months ahead.

Bottom line: I believe that this week's two new developments -- namely, the improved prospects for a Romney presidential election win in November and lower interest rates -- will serve to limit the degree of market consolidation that I previously had expected, and raises the probability that new highs in the S&P 500 will be achieved later in the year. At the same time, the prospects for lower interest rates will negatively impact certain financial companies. Net-net, I still expect a correction (though more shallow than previously thought) and a period of backing and filling ahead -- before a new bull market leg commences.

Volume was light and we drifted lower, but there was some good action under the surface. Breadth was nearly 2-to-1 positive and all major sectors except pharmaceuticals were in the green.

What was most interesting, though, was the relative strength in small-caps and Internet-related names. News that Facebook expects to announce its initial public offering next week ignited a wide range of names -- many of them having nothing at all to do with Facebook -- but this sort of action is more about a positive mood than balance sheets and income statements.

It's always refreshing to see these flurries of speculative action develop, but the big picture is little changed. We continue to hold up extremely well and there is underlying support, but the upside momentum is muted in many cases. We aren't breaking down, but we aren't making much progress, either.

The optimistic scenario is that we continue to churn and consolidate, and that builds a foundation for another leg up. The pessimistic view is that if we don't see more upside soon, folks will grow impatient and start locking in recent profits, which will send us downward.

Thursday, January 26, 2012

It has taken 17 days of trading, but we finally had our first day of real selling in 2012. Apparent euphoria over the Federal Reserve's zero-percent interest-rate announcement continued early on, but we topped out in the first 30 minutes and then traded down the balance of the day. We closed near the lows for only the second time this year.

Even though it was the poorest day of the year, it still wasn't that bad. Breadth was only slightly negative and the point losses were mild. The biggest negative was that we had an intraday reversal to the downside after a strong start, which is a change in character.

Whether or not this turns out to be a short-term top will depend on the dip buyers. They have supported this market diligently and that typically doesn't end swiftly. There usually comes a point, however, when the weakness is bad enough to cause the dip-buyers to lose confidence, and that is when a more severe correction often develops.

Wednesday, January 25, 2012

Here's what we're not hearing about the consequences of a zero-interest-rate policy.

The media's peanut gallery is asking the obvious questions of the Fed Chairman in this afternoon's press conference.

The two questions I would like to ask The Bernanke right now are, what is the justification of penalizing the savings class in a multi-year period of zero-interest-rate policy that extends into 2014, and what is the economic and social cost and consequence?

Well?

Even though we saw a decline in pending home sales, the metric continues to show slow improvement.

The pending home sales decline from the highest level achieved since early 2010 was no cause for concern.

Falling by 3.5%, with weakness in Northeast and Southern regions and strength in the Midwest, this continues to show stabilization and slow improvement in the U.S. residential real estate market. I have purchased MTG.

It's been a while since we've rallied on talk of the Federal Reserve's quantitative easing program, but that is what occurred today. There wasn't any specific plan mentioned for further easing in today's policy statement, but Chairman Ben Bernanke made it clear that the Fed is ready, willing and able to act should the economy falter.

Some might think that it was a negative that the Fed feels the economy is weak enough to justify keeping interest rates low until the end of 2014, but the prospect of endless cheap money had the bulls salivating.

This morning, it looked like the exceptionally strong report from AAPL wasn't going to do much to spark the broader market. In fact, the S&P 500 and the DJIA were trading in negative territory despite the stellar news. But a whiff of quantitative easing from the Fed was all it took to light a fire. Precious metals exploded higher, the U.S. dollar was hit hard, and oil and commodities ran as market players rolled out their QE playbooks.

Tuesday, January 24, 2012

Wells Fargo had a bullish note on the automobile industry this morning.

The firm's channel checks indicate that January light vehicle SAAR could be as much as 13.8 million.

MTG

The company's reported quarterly loss was less than what was expected.

MGIC Investment's (MTG) loss, at $0.67 per share, was a bit better than the consensus expectations for a loss of $0.81 per share.

Let's put some perspective on Joseph Granville's call for a 4,000-point drop in Dow.

Speaking of market opinions -- similar to noses everybody has one! -- legendary Joe Granville appeared on Bloomberg Television yesterday afternoon and predicted a 4,000-point drop in the DJIA in 2012.

This morning Arthur Cashin wrote about and put Mr. Granville's record into perspective:

Joseph Granville, whose "sell everything" call in 1981 sparked a decline in U.S. stocks, said the Dow Jones Industrial Average (INDU) will drop toward 8,000 this year because of waning momentum and volume. "Volume precedes prices," Granville, 88, a technical analyst who has been publishing the Granville Market Letter from Kansas City, Missouri for about 50 years, said in an interview on "Street Smart" on Bloomberg Television. "You are seeing much lower volume. That tells you that prices are going to go much lower, much lower than most people think possible and very few people have projected.

The article did a brief review of some of his prior calls:

Trading in U.S. stocks fell to the lowest level since at least 2008 amid mutual fund withdrawals and Wall Street job cuts. An average of 6.69 billion shares changed hands on U.S. exchanges in the 50 days ended Jan. 18, the fewest on record in Bloomberg data starting three years ago that excludes over-the- counter venues. On the New York Stock Exchange, volume has tumbled to the lowest level since 1999, the data show.

Granville told newsletter readers to "Sell Everything" on Jan. 6, 1981. The Dow fell 2.4 percent the next day. He correctly forecast the bear market of 1977-78 and the burst of the Internet bubble that began in 2000. In March 2008, Granville said the Dow would end the year near 9,000, more than 27 percent below its level of 12,392.66 at the time. The gauge finished the year at 8,776.39.

His predictions proved less prescient during some of the previous bull markets. He failed to foresee the rally that started in 1982 and lasted for five years. He also called for losses in 1995 while the S&P 500 rose every year till 2000.

Occasionally spotty, or not, when Granville makes a call, you can be sure it makes a headline or two."

-- Art Cashin

Joe Granville graduated from the Todd School for Boys in Woodstock, Ill., a school made famous by the graduation of another entertainer, Orson Welles, and briefly attended Duke University. Granville's first book, A School Boy's Faith, was a travelogue in poetry.

After enlisting in the Navy, Granville joined E.F. Hutton. He quit six years later to start the Granville Market Letter.

Thirty years ago, Kansas City-based market technician Joe Granville was seen as a Wall Street prophet. He was one of the first market technicians to use on-balance volume as a means of predicting stock prices. Under the sponsorship of an unknown brokerage firm, Arnold Securities, Granville began to tour the world, giving a series of traveling seminars in the late 1970s and early 1980s.

He had a remarkable run of prescient market calls that resulted in international recognition.

His "sell everything" message to subscribers in January 1981 (see Cashin's comments above) made headlines around the world; the Dow fell 2.5% on the next day and 1.5% on the day after that.

Granville's fame and seminars grew in size and sensationalism. Toward the end of his skein, his presentations were staged in huge hotel auditoriums, and attendance was always standing-room only. The crowds were boisterous in response to the circus-like festivities, which typically included belly dancers, a band and often clowns.

Granville made a dramatic entrance in each of these "seminars," dressed in a tuxedo as he walked down a long aisle while the crowds cheered the messiah's next coming. His antics were wild, in marked contrast to the more subtle presentations then seen on Wall Street. Once, on the stage of one of his seminars, Granville dropped his tuxedo pants and pointed to stock symbols printed on his boxer shorts, ending with a delighted cry of, "And here's Hughes Tool!"

Granville is now 88 years old and, similar to the Energizer Bunny, is still ticking with an opinion to go with it.

Last night Romney seemed to have won a split decision in the Florida debate. The two candidates are now in a statistical tie for the run to the Republican presidential candidacy, according to Gallup. On InTrade, Gingrich is a 60% probability to win Florida and Romney is at nearly 40%. Romney is at 63% to be the Republican presidential candidate on Intrade.

Romney revealed his taxes this morning and we learned what we knew -- he is rich.

The bears keep waiting for the underlying strength in this market to falter, but the dip-buyers aren't backing down. We gapped down to start the day but worked steadily higher and closed at the highs. The indices didn't have much to show for it, but it is impressive that the bears are incapable of building on any weakness.

The reversal in oils was probably the biggest driver of the intraday bounce, but it was mild action without any major leaders or laggards.

AAPL numbers are out and it looks like blowout -- very strong numbers across the board and guiding upward for the second quarter. The stock is going to open up huge and the chase will be on.

AAPL is a major factor in the indices, so look for a gap up open on this news in the morning. We are going to be even more technically extended, but as we all know, trying to fight an uptrending market because it is overbought is extremely dangerous.

Monday, January 23, 2012

The Republican debate tonight in Tampa should be fascinating, especially after the South Carolina results on Saturday.

He's baaaaaaaaaaaaaaack! Joe Granville was on Bloomberg Television, calling for a 4,000-point drop imminent in the DJIA. Enough said.

The history of tech is littered with companies that failed to reinvent themselves and ultimately succumbed to the weight of legacy and rapidly obsolete businesses.

It is why both the shares of Research In Motion and Yahoo! should be avoided, from both Jim Cramer's and my perches.

Money managers are unhappy because 70% of them are lagging the S&P 500. Economists are unhappy because they do not know what to believe: this month's forecast of a strong economy or last month's forecast of a weak economy. Technicians are unhappy because the market refuses to correct and gets more and more extended. Foreigners are unhappy because due to their underinvested status in the U.S. they have missed a big double play: a big currency move plus a big stock market move. The public is unhappy because they just plain missed out on the party after being scared into cash. It almost seems ungrateful for so many to be unhappy about a market that has done so well. Unhappy people would prefer the market to correct to allow them to buy and feel happy, which is just the reason for a further rise? Frustrating the majority is the market's primary goal.

We have entered a new phase, the Republican primary as John Grisham novel. Secret offshore bank accounts, broken love, the testimony of anguished ex-wives: "He wanted an open marriage." A battered old veteran emerges from the background and, in his electoral death throes, provides secret information—"I'm for Newt"—that he hopes will upend a dirty, rotten establishment. A vest-wearing choir boy turns out to have been the unknown winner of that case back in Iowa. And all this against the backdrop of a mysterious firm that moves in and destroys communities—"When Mitt Romney came to town . . ."—while its CEO pays nothing in taxes.

If you are a Republican who hates a mess, or if you are a member of that real but elusive and hydra-headed thing, the GOP establishment, you are beside yourself with anxiety and unhappiness. You think: "They're losing this thing! They're going to limp out of South Carolina, they'll limp through Florida, they're killing each other and killing the party's chances. How will they look by the fall? What are independents going to think of the guy we finally put up? We all know politics ain't beanbag, but it's not supposed to be a clown-car Indy 500 with cars hitting the wall and guys in wigs littering the track!"

There's been a lot of damage. We lose sense of it in the day to day, but in the aggregate it's going to prove considerable....

The bleak thought: Mr. Obama this week blocked Keystone pipeline, a decision that means tens of thousands of jobs lost, new energy possibilities rejected. It is a decision so bad, so political, that it amounts to a scandal. But it just sort of eased through the news, blurrily. All the cameras were focused on the Republicans, who were distracted by their own dramas. They did not, together, in one voice, protest, as they should have. Keystone happened while they were busy looking like the Keystone Kops.

What's happening out there on the trail is a great story. But it's not a good story. And the past few days it didn't feel like a story that was going to end well.

-- Peggy Noonan, "The No-Obama Drama," The Wall Street Journal

Then there are the unpredictable twist and turns (and the investment implications) of political change -- think The Ides of March.

A week ago, Mitt Romney was wrapping up his likely nomination as the Republican presidential candidate.

No more.

The clear winner in South Carolina on Saturday night may not have been Newt Gingrich; it might have been President Obama.

Endorsements from established Republican leaders (Portman, DeMint, Graham, Pawlenty, Haley etc.) are no longer enough after Romney has only succeeded in winning one of the Party's first three state caucuses/primaries. Romney must now retool given the ascendancy of Gingrich's candidacy.

The prospects for regime change (and a new and market-friendly administration in 2013), which was one of my key market catalysts, has taken a turn for the worse, for now, with the newfound popularity of Republican presidential aspirant Newt Gingrich and the growing, heated and divisive conflicts between him and Mitt Romney. This emerging development has likely reduced the assurance of a Romney candidacy and what I had assumed to be a Republican November win. (The Republican Party is generally viewed as the more business- and market-friendly party.)

And Then There Is Europe

Europe's leaders are committed to keeping both the euro and the eurozone as it is. But for it to do so, everything must change, as the wonderful quote from the 1958 Italian novel suggests. This is no easy task, as no one wants a change that will impact them negatively; and there is no change that will allow things to stay the same that does not impact all severely, as we will see. In the third part of a continuing series, we look at the actual options that are available on the menu of choices, or as one group called it, the menu of pain.

Over 2,150 years ago, the Roman poet Virgil once said, "I fear the Greeks, even when they bring gifts."

Virgil was ahead of his time!

The sovereign debt crisis saga continues.

While a potentially fatal affliction (and systemic risk) in Europe's ongoing saga has seemingly been taken off the table, morphing instead to a difficult condition that must be monitored closely, the heavy lifting of promised austerity and fiscal responsibility lies ahead, and with it, uneven progress, additional crises and uncertainty.

Some Positives but Future Economic Uncertainty

On the other hand, the market's price momentum is excellent, volatility is on the descent, as the major indices have not had a more-than-1% move on any day during the last 13 trading sessions (an important ingredient to improving investor confidence), and the high-frequency domestic economic statistics are showing continued improvement (albeit there was some deceleration in the rate of growth towards year-end). Regarding the latter point, we have to watch and be mindful that some of the recent improvement in economic growth reflects the consumer eating into his/her savings and 100% capital spending tax credits/benefits were in place -- they halved on Jan. 1, 2012 -- so it would not be surprising if some of the recent strength in fourth-quarter 2011 had been borrowed and pushed forward from early 2012. More squishy economic data in the first half will not likely be greeted well by investors, especially in the context of the recent market rise.

There's no shortage of reasons why this market should pull back a little, but the bulls remain extremely stubborn. We had a sharp intraday reversal after early strength, but the dip-buyers provided support once again and kept the indices almost exactly flat.

Breadth was positive and strength in financials, precious metals, steel and coal kept the buyers busy, but oil stumbled and technology names were mixed. AAPL helped to cover up some weakness as anticipation for its earnings tomorrow night grew.

The market has substantial technical challenges and the arguments in favor of some sort of pullback continues to grow, but if there is one thing we've learned, the market can be extremely sticky to the upside even when it is obviously extended.

We have a slew of earnings reports hitting the rest of the week and I'm still concerned that the setup for some "sell the news" action is quite high. So far, we have avoided any major profit-taking or a rush to the exits, but there were quite a few reversals today in some stocks that have been squeezing higher, such as SHLD, SBUX and AMZN.

It was a deceptive day of trading, especially if you just looked at the DJIA, which rose nearly 100 points. The gain was entirely due to strong action in MSFT, IBM and INTC. Both the S&P 500 and Nasdaq were flat, but that was mainly due to big buy programs that hit in the final 15 minutes of trading.

GOOG was mostly ignored, but there was some weakness in key names such as AAPL, ISRG and AXP. Small-caps lagged with oil and gas plays being the worst of the bunch.

Perhaps the "sell the news" play was too obvious, especially with GOOG such a clear disappointment, but it sure looked like there was a concerted rotation into the slow-growth technology names. Perhaps that was driven by option expiration to some degree, but when market players are dumping the more speculative names and loading up on MSFT instead, you have to be at least a little concerned - or perplexed.

There are a number of things I didn't like about today's action, such as the leadership by slow-growth technology, the underperformance of speculative stocks and the highly manipulated close, but fighting the price action isn't the way to make money.

Thursday, January 19, 2012

LNC - I'd be interested again below 20. I have learned today (in a form 8-K SEC filing) that Frederick Crawford, the Executive Vice President of Corporate Development at LNC, has resigned (effective Jan. 20, 2012) and will be joining CNO shortly.

Unfortunately, I have to conclude that Lincoln National will not be sold anytime soon, as Crawford would not likely forego options and/or a golden parachute (on a control change) and leave the company if a deal was imminent or in the works.

"Volatility is fairly common this time of year."

-- Labor Department

Initial jobless claims came in 50,000 lower than the prior week's report at 352,000 (and compared to 384,000 consensus).

There has been no laugher in mutual fund land over the last few years as individual investors have fled equity funds for over five years.

Individual investors have taken out $450 billion from domestic equity funds since 2007 and have added $850 billion into bonds. That swing of $1.3 trillion is unprecedented in history.

Meanwhile hedge funds, according to The ISI Group, are now at their lowest net long exposure since the Generational Low of March 2009. And large pension funds are disproportionately skewed in a flight to safety into fixed income over equities.

It is for the reasons above that I have reasoned poor investor sentiment as a foundation block for the bullish market case this year and why the weekly investor surveys are not a particularly a good gauge for evaluating investor confidence. I prefer to watch what investors do, not what they say.

That said, according to ICI after 20 weeks of consecutive outflows of equity-focused U.S. mutual funds, the latest week showed a modest $1.5 billion of inflows.

This could be the start of something far bigger, like an inflection point after five years of negative fund inflow datapoints.

So, if you are looking for a catalyst for higher stock prices in a slow-growth enivronment, I continue to see a rotation into U.S. stocks and out of bonds (of all types) as a major investment theme in 2012.

I'm looking at TROW, WDR, OZM, LM, SCHW and ETFC, who will be material beneficiaries of a gradual move back into stocks (and out of bonds).

Already, the shares of the aforementioned are starting to outperform as investors seem to be anticipating a bigger reallocation trend that might have already started.

As Zeppelin's Page and Plant went on to write:

"And it's whispered that soon if we all call the tune
Then the piper will lead us to reason.
And a new day will dawn for those who stand long
And the forests will echo with laughter."

The earnings reports are coming in and, so far, the big news is that GOOG missed both the top and bottom line and the stock is down sharply in after-hours trading, about 9%.

IBM, INTC, MSFT and ISRG are all trading slightly higher on their reports. There aren't any big upside surprises, but the numbers are good enough to keep the sellers at bay.

Today is particularly important to see if a "sell the news" reaction takes hold. Expectations are fairly high, and we are technically extended and in need of consolidation, so conditions are ripe for selling. But the dip buyers have been in control recently and have not been in a hurry to step aside.

Although the indices went out near their highs today, there were quite a few pullbacks in individual stocks intraday. We are just too extended in places for profit-taking not to occur. The big issue is whether it develops into something more extreme once we pause. The latter part of January has a tendency toward weakness.

One of the complaints about this market recently is that we have not seen good sustained momentum intraday. That changed as today was a solid trend day. The dip-buyers jumped in on some very minor weakness and then pushed us higher all day long. Breadth was solid at almost 3-to-1 positive.

Oil, banks, retail and biotechnology all performed well but the star of the show was semiconductors. Good reports from LLTC and ASML caught a lot of folks by surprise and set the sector on fire.

While it good to see some leadership in technology names, the pessimists were mumbling about how strength in chips so often marks a market top. We have seen it happen quite often where a big move in the SMH comes shortly before a market turn. I'm not buying the argument, but it is worth noting as earnings roll out.

We have some earnings hitting tonight, most notably FFIV, but tomorrow afternoon is when the major fireworks start. After the close tomorrow, we have AXP, GOOG, IBM, INTC, ISRG and MSFT. That will be the most important night of earnings this quarter, so look for a lot of jostling around tomorrow as market players move into position.

Tuesday, January 17, 2012

Barron's published a negative column on the private mortgage insurers over the weekend that seemed hyperbolic, inconsistent and wrong-footed in areas of (fundamental) substance.

Specifically, the Barron's column suggested that reserves are understated based on the analysis that defaults will rise and cures will come down in the period ahead.This simply is inconsistent with the recent and current data trends that are incorporated in industry reserve policy.

The article failed to identify some positives (e.g., the runoff value of the industry's portfolio) and failed to recognize that the housing markets (pricing, turnover and new orders) are, in general, stabilizing and, in areas not exposed to large shadow inventory for sale, certain regions are actually improving.

Finally, the article didn't incorporate some positive news that came from RDN late last week.

Run, don't walk, to read Jeff Matthews' blog on Sears Holdings today.

SHLD shares are trading much higher this morning after Lampert added to his personal holdings in the shares.

The January New York Manufacturing Survey surprised to the upside, rising to 13.5 (consensus was 11.0) and comparing to 8.2 in December.

This is the best number in seven months.

New orders rose to 13.7 from 6.0, and backlogs were less negative. Employment improved markedly from 2.3 to 12.1.

Domestic and non-U.S. concerns are known, will not likely be discounted again and, importantly, will likely diminish in consequence. Markets typically fall or rise (sharply) on the unexpected. Our fiscal imbalances and those of our counterparts are more appreciated than they were a year ago, when there was almost universal agreement (by the Fed, Wall Street strategists, etc.) of a normal duration (to history) and self-sustaining economic cycle. That optimism was incorporated in a consensus 15%-20% gain for the U.S. stock market and proved incorrect. Good times (late 2010) morphed into worsening times last year, as economic growth expectations failed to be realized and were marked down. With the benefit of hindsight this provided a strong headwind to stock prices in 2011.

Monday's European equity markets closed near their highs; our futures are substantively higher; French, Spanish and Italian bond yields dropped; and the euro has advanced smartly against many currencies (up by nearly 1% against the U.S. dollar at the time of this writing) -- it is not out of the question that the reaction will not be dissimilar to the reaction to the U.S. downgrade during the summer. On the positive side, S&P's (those wonderful folks who brought us AAA subslime ratings back five years ago) European ratings change could serve as a catalyst to hard but coordinated fiscal and political decisions -- the heavy lifting is still ahead -- that will ultimately produce more positive outcomes and stability.

As I have previously written, European "tame and timid" will, in the fullness of time, become "shock and awe," as Europe's leaders and central bankers eventually do what has to be done. February's liquidity add through the long-term refinancing operation facility will likely stabilize the debt crisis in Europe. And the ECB is already thinking more "shock and awe" based on a report in The Wall Street Journal this morning. In the fullness of time, Greece (which all now know is already bankrupt) and its lenders will agree to deeper writedowns of debt, as that country remains in the EU. More is to come.

Negatives have been sufficiently discounted. The S&P 500 now trades at only 12.2x estimated 2012 earnings consensus, 3 multiple points below the last 50 years' average (when the yield on the 10-year U.S. note approached 6.70%) and nearly 7 multiple points below times in history when interest rates and inflationary expectations were similar. The consensus, upbeat 12 months ago, is now downbeat, as vividly illustrated by the interview with Pimco's Bill Gross who, along with many others, ask now whether there will be another economic/debt apocalypse. But how will the apocalypse occur?

With "the new normal" of de-leveraging, re-regulation, de-globalization and slowing economic growth now embraced by consensus, investors' expectations are lowly ebbing, as individuals and institutions have materially de-risked in response to growth assumptions. Economic growth expectations, which surprised to the downside in 2011, have been recast to lower expectations as a baseline view and, as such, have been materially discounted. Surprises could come from the upside in 2012 to that baseline and lowered view. (Last night already saw two surprises, as the German confidence index exhibited the largest one-month rise in history and China's GDP rose better than expectations. The later report resulted in the largest upside move in the Chinese stock market since late 2009.)

A market crescendo will build throughout 2012. I expect that U.S. share prices will slowly climb the wall of worry in the first half of the year as the European crisis stabilizes, owing to a growing commitment by European leaders and central bankers to do whatever is necessary to avoid the unimaginable. At the same time, high-frequency domestic economic statistics will likely continue to gradually improve, led by surprising strength in housing and automobile industry sales.

Prospects for a U.S. political regime change will embolden investors as the year unfolds. A business- and market-friendly Republican leadership will look increasingly likely to replace the current administration as the year progresses. A crescendo-like buildup in consumer and business confidence will likely unfold.

Interest rates remain low, and inflation stays quiescent. A market-friendly Fed (and a worldwide global loosening of the monetary reins), a still-large manufacturing output gap and a "not too hot, not too cold" jobs picture (which will contain wage inflation and protect corporate profit margins) could contribute to a crescendo-like buildup in stock valuations. It is not inconceivable that the contraction (around 15% in valuations in 2011) will be entirely reversed in 2012. This expansion in multiples, coupled with near-10% earnings growth, could produce an outsized and totally unexpected 20%-25% gain the S&P 500 this year.

Today was one of those days that looks good if you just consider the closing numbers, but much less positive if you consider the intraday action.

The market gapped up and then did absolutely nothing. Breadth deteriorated steadily and the vast majority of stocks closed lower than they opened. We did stay positive, and the Nasdaq led, so give the bulls respect, but they have had a tendency to be very lazy following these big gap-up opens.

The challenge of this market is that we have good underlying support but very little strength other than the gaps that we had three Tuesday mornings in a row. It is much harder to catch the recent strength than many people think. Obviously, the buy-and-holders are happy no matter how the market gains. But for active traders, this environment makes it very hard to have good long exposure at the right time.

One positive for the bulls today was that the poor earnings report from C didn't do more damage. Financials were the primary laggard today, but the pullback was mild and there didn't seem to be any great worry, even with heavyweight GS on deck in the morning. On the other hand, C continues the pattern of weak earnings that we have seen so far this quarter, and you have to wonder if the market can shrug it off for long if the onslaught continues.

Overall, the market action isn't bad but it lacks energy, momentum and leadership.

Sunday, January 15, 2012

The University of Michigan confidence survey came in at 74, almost 3 points above expectations and up from 69.9 last month.

Outlook and current conditions improved.

This was the fifth straight month of improving prints in confidence.

Here is a good synopsis of the S&P downgrade issue by Miller Tabak's Peter Boockvar:

With the likelihood of an S&P credit downgrade of France, Spain, Italy, Belgium and Portugal, it's important to understand that #1, they are just following what the markets have priced in and #2, Fitch and Moody's in some circumstances have already moved ahead of S&P. With respect to France, they will likely lose their AAA rating at S&P but Fitch specifically said earlier in the week that they will maintain their AAA rating for them thru 2012. On Italy, S&P is currently at A, in line with Moody's and one notch below Fitch. A downgrade will likely take them to A-. With Belgium, S&P is at AA, one notch above Moody's and one below Fitch. Portugal has a BBB- S&P rating, two notches above Moody's and one above Fitch, so catch up is what S&P would be doing with them. With Spain, S&P is already one notch above Moody's at AA-. We'll also see whether Austria loses its AAA rating. Following a French downgrade, the EFSF will also lose its AAA rating but buyers of EFSF bonds have certainly been put on notice that it was a high likelihood. I say this all from a credit perspective because equity markets have behaved with a much more sanguine view of things that doesn't fully square with the reality of a very tenuous global economy.

JPM - investment banking and capital markets activities were worse than expected while credit and compensation ratios were better. A lower tax rate (22% vs. 34% consensus) contributed to the bottom line, which appeared to be about $0.95 a share at its core.

The bank completed its buyback program (nearly $1 billion in fourth quarter 2011).

The commentary indicated an improving commercial and industrial loan picture and continued progress in credit.

As GS mentions in its assessment of this report, it was a relatively low-quality report (after 11 consecutive quarters of beats), which could weigh modestly on the bank sector (after its market-leading performance thus far in 2012).

Every American citizen should be concerned about the Fed's lack of transparency and poor forecasting abilities.

Richmond Fed President Jeffrey Lacker was forecasting 2011 real GDP growth in the U.S. at 3.5%; it came in half that amount.

Lacker admits that he and the other Fed members only recently realized that the structural headwinds (fiscal imbalances, structural unemployment, etc.) in the U.S. will limit and be a governor on domestic growth.

I find this mind-boggling and scary, as, with 150-plus economists on staff, this is not exactly confidence-building and exposes a serious and fundamental flaw in the Fed's forecasting and in the policy based on that errant forecasting.

As a result, it shouldn't be too surprising that many, in support of Ron Paul, are in favor of abolishing the Federal Reserve.

It's embarrassing for the Fed. You see an awareness that the housing market is starting to crumble, and you see a lack of awareness of the connection between the housing market and financial markets. It's also embarrassing for economics. My strong guess is that if we had a transcript of any other economist, there would be at least as much fodder.

-- Justin Wolfers, Economics Professor at the University of Pennsylvania

This morning, the Fed released transcripts from the mid-2000s (covered by both The Wall Street Journal and The New York Times) that revealed an unflagging optimism and provided a profoundly unflattering view of Greenspan, Geithner, Bies, Warsh, Yellin, Bernanke et al. in their ability to foresee the economic collapse and debt crisis in 2007-2009.

Here are some examples of several wrong-footed quotes from some of the Fed's players during the 2006-2007 period, which was the end of the housing boom:

"I think we are unlikely to see growth being derailed by the housing market."

-- Ben Bernanke, Federal Reserve Chairman

"It's fitting for Chairman Greenspan to leave office with the economy in such solid shape. The situation you're handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot."

-- Janet Yellen, Vice Chairman of the Federal Reserve

"I'd like the record to show that I think you're pretty terrific, too (referring to Greenspan). And thinking in terms of probabilities, I think the risk that we decide in the future that you're even better than we think is higher than the alternative."

"I would say that the capital markets are probably more profitable and more robust at this moment, or at least going into the six-week opportunity, than they have perhaps ever been."

-- Kevin Warsh, Former Federal Reserve Governor

The Fed's lack of transparency and poor forecasting abilities (at nearly every inflection point) should be a concern to every American citizen, as the Fed wields huge power in establishing monetary policy.